A Profit Blast From The Past

In many ways, the fourth quarter of 1993 seemed like a page from the history books. Detroit's cars and trucks sold like crazy. Fashions at Sears, Roebuck & Co. were in demand. Conglomerates saw their profits surge. Even IBM turned a profit for the first time since early 1992.

Happy days were here again for much of Corporate America in the last quarter of 1993. The gross domestic product surged 5.9%--the fastest clip since 1987. Inventory levels were at historic lows. Consumer spending held steady, pushing up sales for the 900 companies in BUSINESS WEEK's Corporate Scoreboard by a healthy if unspectacular 5%. Fourth-quarter profits jumped 27% as companies continued to reap the benefits of recent restructurings and cost-cutting. "It was a wonderful quarter. [The economy hit] its sweet spot for profits," notes Maureen F. Allyn, chief economist at Scudder, Stevens & Clark Inc. "The reason profits are rising faster than sales growth is the wonderful leverage you get in a period of acceleration."

LAST CALL? The fourth-quarter boom, spurred by consumer spending, purchases of capital equipment, and construction, helped buoy results for all of 1993, when profits rose 19% and sales 5%. But profit growth in the coming year is expected to be more modest, since the big cost-cutting gains are largely behind most companies and the effect of the big federal tax hike may soon show up on companies' bottom lines. Lacy H. Hunt, chief U.S. economist at HSBC Holdings PLC, expects profit growth to range from 7% to 9% in 1994, with sales again growing by approximately 5%. "The cumulative effect of the $42 billion [corporate] tax increase will nibble at the economy's underpinnings," Hunt predicts.

Exxon Corp. ruled the roost of BUSINESS WEEK's Top 25 earnings leaders of 1993. Profits at the giant oil company jumped 10% last year, to $5.3 billion, while its sales slipped 5%, to $99.2 billion. Despite declining oil prices as the year drew to a close, Exxon continued to benefit from its long-running restructuring and cost-cutting efforts. Reduced operating expenses contributed more than $450 million to Exxon's aftertax earnings in 1993. The company's results were also bolstered by improved refining and retail-gasoline margins, particularly overseas, and by some new oil-and-gas production projects.

But 1993 was not a golden year for everyone. The 1992 profit leader, Philip Morris Cos., dropped to the fourth spot on the most profitable list for 1993. The food-and-tobacco behemoth was wounded by a tobacco price war it touched off in April when it slashed the price of its Marlboro cigarettes in an effort to gain back eroding market share. All told, Philip Morris' profits sank 28%, to $3.6 billion.

At least Philip Morris still made money last year. At IBM, a slim profit of $382 million in the fourth quarter didn't come close to offsetting losses for the entire year, which totaled nearly $8 billion. That made Big Blue the biggest money-loser of the year. Another big loser was Flagstar Cos.: The owner of the Denny's and El Pollo Loco family-style restaurant chains lost $1.7 billion in 1993, largely because of a huge write-off of goodwill and a restructuring charge.

ENGINE TUNE-UP. Among industries, autos were by far the big winner, with General Motors, Chrysler, and Ford crowding around the top of the most profitable list. What got the Big Three's engines running? An 8% jump in car and light-truck sales led the general economic turnaround. Detroit also won back some market share from Japanese auto makers, whose prices in the U.S. were forced up by the soaring yen. As demand strengthened, carmakers were able to scale back on rebates and other incentives, which aided the bottom line.

Retailing also saw an industrywide upswing, as 1993 profits surged 206% against weak year-ago results. And while it's no longer the nation's largest retailer, Sears was the most profitable shopkeeper of 1993. Thanks partly to a $635 million gain on the initial public offering of its Allstate Corp. unit, Sears earned $2.4 billion on sales of $50.8 billion. With $68 billion in sales, Wal-Mart Stores Inc. is the retail-sales champion, but its profits were a second-place $2.3 billion, up 17% from the year before.

Industries that set themselves apart with declining profitability included tobacco, because of the price war ignited by Marlboro, and telephone companies. The Baby Bells' operating profits were up about 6% for the year, while revenues rose by 4%. But huge restructuring dragged down net income by 37%, to $5.6 billion. The charges were for layoffs and write-offs of obsolete copper-wire equipment, which is being replaced by fiber-optic cable. Analysts say the Baby Bells need to clean house as much as possible in anticipation of a flood of competition for local phone service, which is expected to grow brutal by 1996.

Looking ahead, BUSINESS WEEK forecasts that corporate earnings will keep rising in the first half of 1994. Aftertax profits for all corporations should increase about 10% in the first and second quarters, compared with the same period of 1993. While that's less than half the jump that profits took in the fourth quarter, it should be kept in mind that economic growth is expected to slow to around 3.5%, or roughly half its galloping rate of the fourth quarter. Although the Commerce Dept. reported preliminary fourth-quarter growth in gross domestic product of 5.9%, that figure is expected to be revised to about 6.5% on Mar. 1. The 900 companies in the BUSINESS WEEK Scoreboard account for some 50% of all the profits generated in the economy.

What's keeping this upturn chugging? Revenues will benefit from domestic demand that shows no signs of flagging. The sectors to watch: housing, consumer durables, and high-tech capital equipment. And companies that export to Southeast Asia and Latin America can count on those customers to keep orders flowing, though Japan and Europe probably won't be buying much until the second half of the year.

MORE FOR LESS. On the cost side, businesses still won't see their labor bills cutting into margins, because wages and salaries are unlikely to grow much faster than the inflation rate. And these big gains in productivity mean that companies, especially those in manufacturing, are turning out their wares much more efficiently. But most companies will have little leeway to increase prices as a way of raising profits.

Still, the momentum gained from an especially strong finale to 1993 will act as "a hell of a benefit" in keeping companies rolling along, says Goldman, Sachs & Co. Senior Economist Edward F. McKelvey. Lacking the sustained boom that typically follows a recession, Corporate America will have to measure its stop-and-go recovery one great quarter at a time.

                  THE TOP 25 IN SALES
                      1993 sales    Percent change  1992
                 Millions of dollars  from 1992     rank
        1 GENERAL MOTORS   $138,219      5%           1
        2 FORD              108,521      8            3
        3 EXXON              99,161     -5            2
        4 WAL-MART*          67,986     21            8
        5 AT&T               67,156      3            4
        6 IBM                62,716     -3            5
        7 GENERAL ELECTRIC   60,562      6            6
        8 MOBIL              57,151     -1            7
        9 SEARS ROEBUCK      50,838     -3            9
      10 PHILIP MORRIS       50,621      1           10
      11 CHRYSLER            43,600     18           15
      12 KMART               40,889     10           12
      13 DUPONT              37,098     -2           13
      14 CHEVRON             37,082     -7           11
      15 TEXACO              34,071     -7           14
      16 CITICORP            32,196      1           16
      17 PROCTER & GAMBLE    30,067     -1           17
      18 BOEING              25,438    -16           18
      19 AMOCO               25,340      0           19
      20 PEPSICO             25,021     14           23
      21 ITT                 22,762     -1           24
      22 CONAGRA             22,481      5           25
      23 KROGER              22,384      1           21
      24 UNITED TECHNOLOGIES 21,081     -4           22
      25 ALLSTATE            20,946      4           NR
                      1993 profits  Percent change  1992
                   Millions of dollars from 1992    rank
        1 EXXON              $5,280    10%            2
        2 GENERAL ELECTRIC    4,424      3            3
        3 AT&T                3,974      4            4
        4 PHILIP MORRIS       3,568    -28            1
        5 FORD                2,529     NM          992
        6 GENERAL MOTORS      2,466     NM          999
        7 CHRYSLER            2,415    378           99
        8 SEARS ROEBUCK       2,409     NM          998
        9 WAL-MART*           2,333     17            7
      10 INTEL                2,295    115           35
      11 COCA-COLA            2,188     16            8
      12 MERCK                2,166    -11            5
      13 MOBIL                2,084     59           22
      14 FANNIE MAE           2,043     24           12
      15 BRISTOL-MYERS SQUIBB 1,959     27           16
      16 BANKAMERICA          1,954     31           17
      17 CITICORP             1,919    166           59
      18 AMOCO                1,820    114           47
      19 JOHNSON & JOHNSON    1,787     10           15
      20 J.P. MORGAN          1,723     52           19
      21 AMERICAN EXPRESS     1,605    178          109
      22 PEPSICO              1,588     22           23
      23 CHEMICAL BANKING     1,569     44           34
      24 AMERITECH            1,513     12           20
      25 BELL ATLANTIC        1,482      7           18
      *Fiscal year ended January, 1994
        NR=not ranked